Why Is The T-Bill Yield Negative?

The yield on the 1-month T-Bill went negative yesterday.
The yield of the 3-month T-Bill slipped below that of the 1-month - an invested yield curve. Yikes…

There is a lot of speculation as to why this occurred. Here are my two cents –

Bearish
Ukrainian Railway defaulted on a bond payment on non-government guaranteed debt. There is speculation that it will now default on a note guaranteed by the Ukrainian Government.

The Bearish camp would say that there is a new panic forming and investors are willing to pay the Fed to find safety in Treasuries.

If things are so bearish and a new panic is setting in, then why was LIBOR actually DOWN yesterday?

Bullish
The Dollar Carry Trade is in full force. The trade is that you buy US Treasuries and leverage the hell out of them. Your cost to borrow is the yield on the security you are leveraging. With a negative yield, you are now actually GETTING PAID to borrow Treasuries and hold them to maturity.

The Bullish camp would say that Treasury yields are now negative because so many people want to borrow them that they are driving the yield negative. Bond Price Up = Bond Yield Down

I tend to be more in the Bullish camp and think that people are loading up on leverage for one last speculative push into Year End 2009.

The fact that the Carry trade may be so crowded that T-Bill Yields are now negative may be a good indicator that prices will reverse soon (the law of large numbers and all), so be on your toes. Everything still needs to be a trade.

We’ll see how things shake out, but I am looking to buy stuff with the money I raise by selling SLV and HL earlier this week, not sell more stuff to raise more cash.

I will be posting a lot of charts this weekend.